"Choice of Pension Discount Rate in Financial Accounting adn Stock Prices"

Under present financial accounting standards, in Japan and in U.S., firms can hoose pension discount rates, which they use for earnings measurement, at their discretion. First, this paper investigates, what factors affect their choice of pension discount rates. The sample firms in this paper reduced their discount rates, when market interest rate declined in 1990s, more slowly than the tendency in the market. We analyze the causes of this delay by logit model. Regression results show that, given declining interest rate, the significant factor affecting the firmsf choice is not leverage, but profitability (return on equity: ROE). Second, this research investigates empirically how stock prices reflect the size of pension discount rate. Both unamortized pension obligations and pension expenses in the year are positively associated with stock prices. However, the coefficients for the firms, whose discount rates are higher than median, are smaller than those for the firms choosing lower rates. Those coefficients are not significantly different from zero. These results indicate that the firms, which chose lower pension discount rates, are valued higher. This asymmetric result is consistent with the first point in this paper, concerning the firmsf motives for pension discount rate choice.

"Concept and Relevance of Income"

Recently, many people criticize the traditionally accepted principles of realization, matching, and allocation. In addition, the reporting performance project in the International Accounting Standards Board (IASB) is willing to substitute the extant concept of net income for the unexperienced concept of comprehensive income with prohibition of recycling of other comprehensive income. On the other hand, the usefulness or relevance of net income has been repeatedly ascertained in empirical studies. It seems that accountants do not necessarily understand the common knowledge in academic circles correctly. This awareness is one of the motives of this paper to review the empirical evidence on relevance of net income. This paper investigates again to confirm the concept of net income by comparing it with similar concepts, which is closely related to net income. This investigation consists of two parts. The first part in Section 2 compares cash flows with net income by focusing on accounting allocation. This comparison emphasizes the rationale for income measurement with allocation of cash flows. The second part in Section 3 compares comprehensive income with net income. By focusing on the difference between the two (i.e. other comprehensive income ), this paper examines, though indirectly, the essential meaning of net income excluding other comprehensive income. The review in this paper deduces the following conclusion. First, although accruals are criticized for being affected by managerial discretion, they are in fact valuable sources of information for investors . This is a commonly accepted academic theory that has been confirmed repeatedly through comparison of the value relevance between earnings and cash flows. Second, we cannot find the evidence that other comprehensive income is value-relevant, though it is expected to respond to the information needs of accountants and analysts. In sum, net income characterized by realization, matching, and allocation is most useful in comparison with cash flows and comprehensive income.

"Value Relevance of the Multi-step Income Statement in Japan"

This paper investigates the relationship between value relevance of the multi-step income statement and managerial opportunistic behavior. In Japan, net income is disclosed by three steps, i.e., 1) operating profits from core operating activity, 2) ordinary income, measured by adding gains and losses from non-core operating and financing activities to operating profits, and 3) net income that is bottom line performance in the income statement. While Japanese firms achieve income smoothing, loss avoidance and big bath, the managerial opportunistic behavior is simply identified by the observation of multi performance measures. We find that the firms doing income smoothing, loss avoidance and big bath, which are identified by the multi-step income statement, have the different value relevance of earnings from other firms. In many cases, earnings management decreases the value relevance of earnings. The results suggest that the multi-step income statement enables investors to detect earnings management without apparent difficulty and that earnings become more useful when investors use the information contained in it.

Value Relevance of the Multi-step Income Statement in Japan

This paper investigates the relationship between value relevance of the multi-step income statement and managerial opportunistic behavior. In Japan, net income is disclosed by three steps, i.e., 1) operating profits from core operating activity, 2) ordinary income, measured by adding gains and losses from non-core operating and financing activities to operating profits, and 3) net income that is bottom line performance in the income statement. While Japanese firms achieve income smoothing, loss avoidance and big bath, the managerial opportunistic behavior is simply identified by the observation of multi performance measures. We find that the firms doing income smoothing, loss avoidance and big bath, which are identified by the multi-step income statement, have the different value relevance of earnings from other firms. In many cases, earnings management decreases the value relevance of earnings. The results suggest that the multi-step income statement enables investors to detect earnings management without apparent difficulty and that earnings become more useful when investors use the information contained in it.

"Net Income vs. Comprehensive Income A Reexamination of Attributes, Relevance, and Price Informativeness"(in Japanese)

The purpose of this paper is to compare the usefulness between net income and comprehensive income. The results by SUR (seemingly unrelated regression) show the following evidence. Although net income is more persistent than comprehensive income in one year, the persistence of comprehensive income is higher than net income in another year. We cannot support the claim that one is always more persistent than another. Consistent with prior expectation, comprehensive income is more timely than net income. However, we cannot meaningfully test the effect of conservatism on both income. The value relevance and price informativeness of net income is not significantly different from those of comprehensive income. We cannot find the strong evidence, which support the insistence that one is superior to another. These empirical results will make a important contribution to the setting of accounting standard for performance reporting.

Discretionary Determination and Value Relevance of Accrual Expenses incurred by Nuclear Power Plant

This research focuses on the decommissioning cost and the recycle cost of used nuclear fuel, which are incurred by nuclear power plant. We examine what incentive factors affect the discretionary measurement of those expenses in the year and investigate whether the discretionary components are value relevant. First, the recycle expenses in the year is discretionally determined in order to smooth the uncertain fluctuations in operating profits, while the decommissioning expenses is not utilized for income smoothing. If some accruals were discretionally allocated inter-period for the purpose of income smoothing, the discretionary increase in those accruals (i.e. savings of earnings in current period) would communicate the manager's pessimistic forecasts on the performance to investors. Second, as consistent with the above hypothesis, the discretionary recycle expenses is value relevant and the coefficient on them is negative. Moreover, it is negatively related to the one-year ahead operating profits. These evidences imply that the value relevance of the recycle expenses is consistently estimated with the determinants and the predictive power of future performance. Third, both the decommissioning expenses and the recycle expenses do not deteriorate the quality of earnings. We cannot find the evidence supporting the repeated criticism that the opportunity to measure expenses based on managerial discretion must diminish the usefulness of accounting information.

"Analysts' Earnings Forecasts and the Value Relevance of Earnings"(in Japanese)

The value relevance of earnings information depends on the information environments that investors face. In general, under the highly uncertain circumstances, information is not completely nor instantly reflected in stock prices and so the value relevance of earnings is low. The purpose of this paper is to estimate the uncertainty of information environments by data of analysts' earnings forecasts and to investigate the relationship between the uncertainty and the relevance of earnings in JP and US market. In US, though the dispersion of forecasts causes subsequent positive returns, it makes the value relevance of earnings higher. However, it seems that the divergence of opinion does not determine the information environments in JP. In JP, we cannot find the evident relationship between the dispersion and the relevance of earnings. On the other hand, analyst coverage does not affect the relevance of earnings in US while the earnings is more value relevant for firms covered by analysts than firms uncovered in JP. Moreover, the effect of optimistic forecast errors on the value relevance of earnings differs between JP and US. Our results show that earnings is value relevant and earnings information is almost efficiently reflected in stock prices while the subsequent anomalous returns concerning analysts' forecasts exist. Empirical evidence indicates that the information environments in JP are different from that in US and that the relationship between environments and the relevance of earnings also differs. This paper provides the valuable evidence against prior international comparative studies that neglect the differences in information environments.

Net Income vs. Comprehensive Income -A Reexamination of Attributes, Relevance, and Price Informativeness-

The purpose of this paper is to compare the usefulness between net income and comprehensive income. The results by SUR (seemingly unrelated regression) show the following evidence. Although net income is more persistent than comprehensive income in one year, the persistence of comprehensive income is higher than net income in another year. We cannot support the claim that one is always more persistent than another. Consistent with prior expectation, comprehensive income is more timely than net income. However, we cannot meaningfully test the effect of conservatism on both income. The value relevance and price informativeness of net income is not significantly different from those of comprehensive income. We cannot find the strong evidence, which support the insistence that one is superior to another. These empirical results will make a important contribution to the setting of accounting standard for performance reporting.

Bankruptcy Analysis and Going-concern Opinion Is Cox Proportional Hazard Model applicable to the auditing practice?

This paper reviews the literature on bankruptcy analysis, focusing on the association (the logical linkage) between hazard model and going-concern opinion. Hazard model is a technique that can test the relative impact on the bankruptcy risk of a particular factor, but not a technique that estimates the probabilities of the bankruptcy. Therefore, it is doubtful whether the estimation results by the hazard model can be directly applicable to the going-concern audit. Prior studies repeated the data mining in the absence of theoretical background and rational hypotheses, so the important issues are open to further research, i.e. selection of independent and dependent variables, model selection. Before we apply hazard model to the auditing practice, some hard problems should be resolved. For example, the evaluation method of estimated results and the effects on the firm's behavior by modified opinion are not clarified yet. Though many studies report that the information value of going-concern opinion is suspicious, their research design includes problems in many cases. For the present, no definitive conclusion on the information value exists. From the beginning, it is doubtful whether empirical research using public data can unveil the private decision-making process of auditors, who can know the internal (private) information of the firm.